An accounting audit is the process of examining a company's entire financial situation, with an emphasis on ensuring compliance with relevant reporting standards, and promoting adequate cash handling policies and internal controls. In most countries, regular audits by outside firms are required for publicly traded corporations. In contrast, small businesses are typically not subject to as rigorous a set of reporting standards and controls and therefore are often not subject to mandatory audits. Learning how to perform a basic internal accounting audit on your own small business can provide you with a comprehensive understanding of your company's financial strengths and weaknesses.

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Steps

Method 1 of 2: Creating an Accounting Audit Trail

1

Determine whether your business has a sufficient accounting audit trail. An accounting audit trail is the paper and electronic sources that document the history of a business's transactions. Audit trails are used to trace a business's financial data from the general ledger to the source of the transaction/funds. A strong audit trail provides a comprehensive chronological list documenting the steps taken to commence and complete transactions.[1]

Determine if your existing accounting practices enable you to track the complete process of a financial transaction with documentation. If not, your accounting processes must be strengthened in order to create a sufficient accounting audit trail.

Review your small business's existing record keeping policies. All financial information should be stored reliably, securely, and in an organized manner. All relevant information, such as bank statements, cancelled checks, and cash register tapes should be stored at least through the end of each reporting period. Having this information stored and readily accessible will help you resolve any issues or discrepancies that arise.[2]

3

Examine the process by which financial documents are currently given to the accounting department. The first step in your small business's accounting audit consists of gathering financial documents, such as invoices, receipts, and bank statements, and handing them off to the accountant or accounting department for processing. If this process is slow or unreliable, the accounting records will suffer and become unreliable.[3]

4

Create a system for monitoring your company's internal controls. Internal controls are those provisions that help to protect against fraud, theft, and other internal accounting issues. Separate accounting duties as much as is reasonable - for example, it is best not to allow the same person to both handle cash and do the bookkeeping, as this makes it easier to explain away missing cash.[4]

Safes should be locked when not in use, and company software and computers should be password protected.

Camera systems are beneficial for monitoring the execution of internal controls at retail businesses.

5

Consider the accounting and tax laws your business must follow. For tax purposes, you are typically required by law to keep comprehensive accounting records for your business. Preparing your accounting records to be in compliance with the law will make a potential federal revenue audit easier to comply with.[5]

Make IRS procedures such as keeping accounting records for at least six years a part of your internal audit trail process. This way you already have the processes in place that are required to respond external audits from the IRS and other external parties.

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Method 2 of 2: Conducting an Internal Accounting Audit

1

Employ industry accepted audit practices. Good audit practices should serve as your initial guide for conducting your internal accounting audit. Using a business accounting software program, a tax attorney, or an accountant is the best way to ensure that your internal accounting audit is in-line with generally accepted accounting practices.[6]

Cross-reference each part of your company's accounting system. Review each place into which accounting information is input, including the general journal, the general ledger, and individual T-account balances. Account balances should be examined on a continual basis, rather than just before preparing the trial balance at the end of the accounting period.[7]

Make sure that all entries have corresponding entries across each element of your system, and that any discrepancies are resolved quickly.

Compare internal accounting records against external records. Check the fidelity of your own bookkeeping by comparing it against external records. For example, you can compare purchase receipts from your suppliers against your own purchase records. Note that issues that arise through this process may be due to external errors, such as miscalculations by a supplier or customer.[8]

4

Check internal tax records against your tax returns. Look through your recent government tax receipts and compare these against your internal records regarding taxes paid and tax liabilities. In the U.S., keep tax receipts on hand for at least 7 years, as this is the statute of limitations on tax fraud.[9]

5

Create an audit report. Compile a list of your findings into a succinct audit report. This way you have an easy way to access your findings should you receive any external audit requests. Furthermore, an audit report allows you to memorialize in writing your business’s strengths and weaknesses during a specific time period, which will strengthen your overall audit trail process.[10]

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Consider hiring an accountant. The above guidance on creating an audit trail may seem daunting. Consider hiring an accountant if you are unable to execute the necessary processes required to create an audit trail. An accountant can be hired specifically for creating and executing an accounting audit trail process, which you then can oversee without that accountant’s assistance.

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